With reference to public finance, consider the following statements:
1. Tax elasticity measures the responsiveness of tax revenue to changes in GDP, assuming no change in tax policy.
2. Tax buoyancy reflects both the impact of changes in GDP and changes in tax policy on tax revenue.
3. A tax system with high elasticity can ensure a low buoyancy.

Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Question

With reference to public finance, consider the following statements:
1. Tax elasticity measures the responsiveness of tax revenue to changes in GDP, assuming no change in tax policy.
2. Tax buoyancy reflects both the impact of changes in GDP and changes in tax policy on tax revenue.
3. A tax system with high elasticity can ensure a low buoyancy.

Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

ONLiNE UPSC · Accepted Answer

Statement 1 is correct: Tax Elasticity measures how tax revenue responds to changes in GDP, assuming no change in tax rates, exemptions, or laws. It reflects the built-in responsiveness of the tax system.

Statement 2 is correct: Tax Buoyancy captures the combined effect of GDP growth and policy changes (like tax hikes, exemptions removed, rate changes) on tax revenue.

Statement 3 is correct: A tax system may have high elasticity but if the government provides frequent exemptions or reduces rates, the actual buoyancy may be low. Even if the tax system is structurally strong (high elasticity), if frequent policy changes (like rate cuts or exemptions) reduce revenue, then buoyancy can be low. So, high elasticity can have low buoyancy.

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Tax Elasticity and Tax Buoyancy

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M Question 1	⏱ 0
With reference to public finance, consider the following statements: 1. Tax elasticity measures the responsiveness of tax revenue to changes in GDP, assuming no change in tax policy. 2. Tax buoyancy reflects both the impact of changes in GDP and changes in tax policy on tax revenue. 3. A tax system with high elasticity can ensure a low buoyancy. Which of the statements given above is/are correct? (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3